Kazakh currency devaluation triggers fuel shortage

Kazakh currency devaluation triggers fuel shortage

The devaluation in February of Kazakhstan’s currency, the tenge, could have far-reaching effects on the availability of fuel in Kyrgyzstan and Tajikistan.

On February 11, 2014, the National Bank of the Republic of Kazakhstan devalued the tenge by 19 percent. The bank took this step due to its difficulties supporting the previous exchange rate after tapering of the U.S. Federal Reserve’s quantitative easing (QE) stimulus program. QE had caused an outflow of capital from emerging markets and had put downward pressure on the currencies of emerging market economies.

As a result of the devaluation, imports to Kazakhstan have become more expensive, including fuel. Though Kazakhstan is an oil-producing country, its three refineries are currently only able to satisfy 60 percent of domestic demand; the remaining 40 percent must be imported from Russia.

Fuel importers have becomereluctant to import fuel from Russia because of the decreased profitability, but Kazakhstan’s Oil and Gas Minister, Uzakbai Karabalin, committed the government to ensuring that retail prices for fuel would not increase. He also promised there would be no fuel shortages and pledged that the country’s national oil company, KazMunaiGas (KMG), would operate at a loss to achieve these objectives.

In the last few weeks, however, Kazakhstan has experienced a fuel shortage with long lines and angry customers in Almaty, the country’s largest city and former capital, as well as Uralsk, Kostanay and Kokshetau. Retailers hardest hit by the shortage have suspended fuel sales entirely while others have introduced rationing.

Through KMG, the government has pledged to take measures to bring the shortage to a swift end, but the conciliatory rhetoric does not seem to have filtered into other government ministries. When a driver in Almaty called local politicians to vent his frustration over the shortage, the response was quite brusque: “Deal with it (ru),” he was told.

Opinions differ on the cause of the shortage. Some blame the government, citing its recently adopted and later abandoned policy of giving KMG sole import rights from Russia. According to a representative of the Kazakhstan Fuel Association, under this policy, deliveries of fuel decreased by 2.6 times (ru) in comparison with the same time period last year.

The government in turn blames retailers, asserting that there are enough reserves to satisfy demand for 7 – 10 days. According to a press release by a subsidiary of KMG, fuel retailers (i.e. gas stations) are likely hoarding their stores of fuel because rumors circulating in the media have convinced them that an increase in the government-mandated price ceiling on fuel is imminent.

Retailers, for their part, argue that, while the government has set limits on maximum retail prices, there are no such controls on wholesale prices. As a result, though the government committed to operating at a loss in order to maintain constant fuel prices, it is the retailers themselves who are faced with operating losses if they continue to sell fuel at the controlled rate while wholesale prices continue to rise.

Regardless of who is to blame, the shortages are no longer confined to Kazakhstan. The Kyrgyzstan Petroleum Products Association reports that Kazakhstan is now refusing to allow trains transporting fuel from Russia to Kyrgyzstan to transit its territory. The Association explained that these railway shipments are Kyrgyzstan’s only source of fuel and Kazakhstan’s refusal to permit deliveries to its southern neighbor has caused shortages and price rises throughout the country.

In response, the Association has lodged complaints with relevant Kazakhstani ministries to determine the reason for the prohibition on shipments, but so far has not received an answer. Observers note that Kazakhstan signed a 2010 agreement with Russia on the export of petroleum products, pledging to halt exports beginning January 2014 of diesel fuel outside of the Customs Union it shares with Russia and Belarus.

Interestingly, this agreement has been ignored until recently and coincides with the start of fuel shortages in Kazakhstan, giving the impression that Kazakhstan is selectively enforcing the agreement based on the vagaries of its domestic fuel market.

Given that fuel supply lines for both Kyrgyzstan and Tajikistan pass through Kazakhstan, it is likely that continued troubles in the latter country will affect deliveries to Kyrgyzstan and Tajikistan for the immediate future.

About Author

Leroy Terrelonge III

Leroy is a political risk analyst who focuses on Iran and Russia/former Soviet Union countries. He worked for nearly a decade as an Iran analyst at the National Security Agency and holds a Masters in International Business from the Fletcher School of Law and Diplomacy. He is proficient in Persian (Farsi, Dari, Tajik), Russian, Spanish, French, Kazakh, and Arabic.